Knowles CorpKN
Knowles Corp Income Taxes Disclosure
12. Income Taxes
The components of earnings before income taxes and discontinued operations were:
| Years Ended December 31, | |||||||||||||||||
| (in millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Domestic | $ | 60.8 | $ | 32.2 | $ | (118.5) | |||||||||||
| Foreign | 3.2 | 2.5 | 155.8 | ||||||||||||||
| Total earnings before income taxes and discontinued operations | $ | 64.0 | $ | 34.7 | $ | 37.3 | |||||||||||
Income tax expense (benefit) is comprised of the following:
| Years Ended December 31, | |||||||||||||||||
| (in millions) | 2025 | 2024 | 2023 | ||||||||||||||
| Current: | |||||||||||||||||
| U.S. Federal | $ | 0.3 | $ | 0.9 | $ | (1.8) | |||||||||||
| State and local | 1.0 | 0.5 | 0.3 | ||||||||||||||
| Foreign | 5.3 | 4.0 | 15.1 | ||||||||||||||
| Total current tax expense | $ | 6.6 | $ | 5.4 | $ | 13.6 | |||||||||||
| Deferred: | |||||||||||||||||
| U.S. Federal | $ | 5.8 | $ | 4.5 | $ | (38.8) | |||||||||||
| State and local | 0.7 | — | (2.4) | ||||||||||||||
| Foreign | — | 1.4 | (0.7) | ||||||||||||||
| Total deferred tax expense (benefit) | 6.5 | 5.9 | (41.9) | ||||||||||||||
| Total income tax expense (benefit) | $ | 13.1 | $ | 11.3 | $ | (28.3) | |||||||||||
The Company has adopted ASU 2023-09 prospectively as of the year ended December 31, 2025. The reconciliation of income tax expense at the U.S. Federal income tax rate to the Company’s actual income tax expense (benefit) was as follows:
| Year Ended December 31, | |||||||||||
| ($ in millions) | 2025 | ||||||||||
| Income tax expense at U.S. federal statutory income tax rate | $ | 13.5 | 21.0 | % | |||||||
State and local taxes, net of federal income tax (1) | (0.9) | (1.4) | |||||||||
| Foreign tax effects: | |||||||||||
| Cayman: | |||||||||||
| Statutory tax rate difference between Cayman and U.S. | (7.5) | (11.7) | |||||||||
| Malaysia: | |||||||||||
| Non-taxable interest | (4.2) | (6.5) | |||||||||
| Non-deductible interest expense | 9.0 | 14.0 | |||||||||
| Philippines: | |||||||||||
| Tax incentives | (1.0) | (1.6) | |||||||||
| Other | 0.2 | 0.3 | |||||||||
| Luxembourg: | |||||||||||
| Statutory tax rate difference between Luxembourg and U.S. | (1.1) | (1.7) | |||||||||
| Change in valuation allowances | (3.7) | (5.7) | |||||||||
| Non-deductible interest | 9.0 | 14.0 | |||||||||
| Foreign currency income | 3.0 | 4.7 | |||||||||
| Other | 0.7 | 1.1 | |||||||||
| Japan: | |||||||||||
| Statutory tax rate difference between Japan and U.S. | 0.8 | 1.3 | |||||||||
| Foreign currency loss | (2.1) | (3.3) | |||||||||
| Other foreign jurisdictions | 1.4 | 2.1 | |||||||||
| Effect of cross-border tax laws: | |||||||||||
| Global intangible low-taxed income | (0.1) | (0.2) | |||||||||
| Foreign-derived intangible income | (5.8) | (9.0) | |||||||||
| Subpart F | 2.5 | 3.9 | |||||||||
| Tax credits: | |||||||||||
| Research and development tax credits | (1.4) | (2.2) | |||||||||
| Foreign tax credits | (1.7) | (2.6) | |||||||||
| Non-taxable or non-deductible items: | |||||||||||
| Share-based payment awards | 3.2 | 5.1 | |||||||||
| Non-taxable interest | (5.0) | (7.7) | |||||||||
| Non-deductible asset impairment | 0.8 | 1.2 | |||||||||
| Non-deductible foreign currency loss | 1.3 | 2.0 | |||||||||
| Non-deductible amortization | 1.7 | 2.6 | |||||||||
| Other | 0.5 | 0.8 | |||||||||
| Changes in unrecognized tax benefits | (0.2) | (0.3) | |||||||||
| Other adjustments | 0.2 | 0.3 | |||||||||
| Total | $ | 13.1 | 20.5 | % | |||||||
(1) State taxes in California made up the majority (greater than 50%) of the tax effect in this category. | |||||||||||
As previously disclosed for the years ended December 31, 2024 and 2023, the effective income tax rate differs from the statutory federal income tax rate as follows:
| Years Ended December 31, | |||||||||||
| (in millions) | 2024 | 2023 | |||||||||
| Income tax expense at U.S. federal statutory income tax rate | $ | 7.3 | $ | 7.8 | |||||||
| State and local taxes, net of federal income tax benefit | 0.5 | (2.0) | |||||||||
| Foreign operations tax effect | 0.4 | 4.9 | |||||||||
| Research and experimentation tax credits | (1.8) | (1.5) | |||||||||
| Valuation allowance | 4.2 | (14.4) | |||||||||
| Tax incentives | (1.0) | (1.2) | |||||||||
| Tax contingencies | (0.7) | (0.2) | |||||||||
| Tax holiday | 0.6 | 0.5 | |||||||||
| Tax rate changes | 1.0 | — | |||||||||
| Statutory loss net of recapture | (1.5) | — | |||||||||
| Subpart F income | 4.4 | — | |||||||||
| Foreign taxes | (2.4) | — | |||||||||
| Non-deductible and non-taxable interest | 0.6 | (1.5) | |||||||||
| Stock-based compensation | 3.5 | 3.0 | |||||||||
| Impact of intangible property transfers | — | (26.6) | |||||||||
| Other, principally non-tax deductible items | 0.2 | 1.8 | |||||||||
| Global low tax and foreign derived intangible income | (2.6) | 1.3 | |||||||||
| Prior period items | (1.4) | (0.2) | |||||||||
| Total income tax expense (benefit) | $ | 11.3 | $ | (28.3) | |||||||
The components of the Company’s deferred tax assets and liabilities included the following:
| (in millions) | December 31, 2025 | December 31, 2024 | |||||||||
| Deferred tax assets: | |||||||||||
| Accrued compensation, principally post-retirement, and other employee benefits | $ | 11.3 | $ | 10.6 | |||||||
| Accrued expenses | 3.1 | 7.6 | |||||||||
| Accrued interest | (0.1) | 0.1 | |||||||||
| Net operating loss and other carryforwards | 356.5 | 336.1 | |||||||||
| Inventories, principally due to reserves for financial reporting purposes and capitalization for tax purposes | 12.6 | 10.6 | |||||||||
| Unremitted earnings of non-U.S. subsidiaries | (1.2) | 1.6 | |||||||||
| Intangible assets, principally due to different tax and financial reporting bases | 31.0 | 31.9 | |||||||||
| Plant and equipment, principally due to differences in depreciation | 0.4 | 1.0 | |||||||||
| Total gross deferred tax assets | 413.6 | 399.5 | |||||||||
| Valuation allowance | (45.8) | (48.7) | |||||||||
| Total deferred tax assets | $ | 367.8 | $ | 350.8 | |||||||
| Deferred tax liabilities: | |||||||||||
| Net operating loss recapture | (284.4) | (256.1) | |||||||||
| Other liabilities | $ | (2.1) | $ | (4.1) | |||||||
| Total gross deferred tax liabilities | (286.5) | (260.2) | |||||||||
| Net deferred tax asset | $ | 81.3 | $ | 90.6 | |||||||
| Classified as follows in the Consolidated Balance Sheets: | |||||||||||
| Other assets and deferred charges (non-current deferred tax assets) | $ | 82.4 | $ | 91.7 | |||||||
| Deferred income taxes (non-current deferred tax liabilities) | (1.1) | (1.1) | |||||||||
| Net deferred tax asset | $ | 81.3 | $ | 90.6 | |||||||
The Company recorded valuation allowances of $45.8 million and $48.7 million at December 31, 2025 and 2024, respectively, against deferred tax assets from continuing operations as the Company believes it is more likely than not that these assets will not be realized. At December 31, 2025, we recognized an income tax benefit of $2.9 million million related to the reversal of deferred tax asset valuation allowance on certain U.S. state tax attributes. The Company routinely reviews the future realization of deferred tax assets based on projected future reversal of taxable temporary differences, available tax planning strategies, and projected future taxable income. Management believes that it is more likely than not that the Company will realize the benefits of the remaining deferred tax assets.
At December 31, 2025, the Company had $2.4 million of U.S. federal net operating losses that are available, of which none will expire within the next 5 years and of which $2.4 million will expire in the next 6 to 10 years. There are $3.0 million of domestic state net operating losses that are available between 2027 and 2043. There are $311.1 million of non-U.S. net operating loss carryforwards, of which $0.1 million will expire in the next 5 years; $3.3 million will expire in the next 6 to 10 years; $307.0 million will expire in the next 11 to 20 years; $0.6 million can be carried forward indefinitely; and $0.1 million is a capital loss carried forward indefinitely.
The Company has $22.3 million of U.S. federal research and development credits that begin to expire in 2026 and $2.3 million of foreign tax credits that begin to expire in 2034. In addition, the Company has $15.2 million of state credits, of which $1.6 million will expire between 2026 and 2040 if unused, and $13.6 million can be carried forward indefinitely.
As of December 31, 2025, the Company has approximately $1.5 billion of undistributed earnings in its foreign subsidiaries. Approximately $0.3 billion of these earnings are no longer considered permanently reinvested. The incremental tax cost to repatriate these earnings to the U.S. is immaterial. The Company has not provided for deferred taxes on approximately $1.2 billion of undistributed earnings from non-U.S. subsidiaries which are indefinitely reinvested in operations. If these earnings were distributed, they would likely not be subject to U.S. federal income tax because they were previously taxed under the Tax Reform Act. We would likely be required to accrue and pay U.S. state and local taxes and withholding taxes payable to various countries. It is not practical to determine the income tax liability that would be payable if such earnings were not reinvested indefinitely.
Unrecognized Tax Benefits
The Company records interest and penalties associated with unrecognized tax benefits as a component of income tax expense. During the years ended December 31, 2025, 2024, and 2023, the Company recorded interest and penalty expense related to unrecognized tax benefits. As of of December 31, 2025 and 2024 the Company accrued interest and penalties of $0.6 million and $0.3 million, respectively, which were included in Other liabilities on the Consolidated Balance Sheets. During the year ended December 31, 2023, the Company recorded no interest or penalty expense.
The Company's tax returns are routinely audited by the tax authorities in the relevant jurisdictions. Our U.S. federal returns remain open to examination for tax years 2022 to 2024. As of December 31, 2025, we have no tax years under examination by the Internal Revenue Service (IRS). The Company conducts business in multiple foreign, non-U.S. jurisdictions including Malaysia, China, Philippines, India, and the United Kingdom; tax years are typically subject to examination for three to ten years. We are currently under audit by local tax authorities in Malaysia and India for tax years 2018-2024 and fiscal year 2023, respectively.
Included in the balance of total unrecognized tax benefits at December 31, 2025 are potential benefits of $1.5 million, which if recognized, would affect the effective rate on earnings from continuing operations. Given the Company's current valuation allowance position, no benefit is expected to result from the reversal of any uncertain tax position associated with the acquired attributes.
| (in millions) | |||||
| Unrecognized tax benefits at January 1, 2023 | $ | 8.1 | |||
| Reductions as a result of a lapse in statute of limitations | (0.3) | ||||
| Foreign exchange fluctuations | 0.2 | ||||
| Unrecognized tax benefits at December 31, 2023 | $ | 8.0 | |||
| Additions for tax positions of prior years | 0.6 | ||||
| Reductions as a result of a lapse in statute of limitations | (0.6) | ||||
| Foreign exchange fluctuations | (0.1) | ||||
| Unrecognized tax benefits at December 31, 2024 | $ | 7.9 | |||
| Additions for tax positions of prior years | 0.7 | ||||
| Reductions as a result of a lapse in statute of limitations | (0.4) | ||||
| Foreign exchange fluctuations | (0.1) | ||||
| Unrecognized tax benefits at December 31, 2025 | $ | 8.1 | |||
The following is a supplemental schedule of cash paid for income taxes for those individual jurisdictions equaling 5% or more of the total income taxes paid (net of refunds) for the year ended December 31, 2025:
| (in millions) | |||||
| U.S. Federal | $ | 0.8 | |||
| State and local | 0.8 | ||||
| Foreign: | |||||
| United Kingdom | 1.9 | ||||
| Denmark | 0.9 | ||||
| Japan | 0.4 | ||||
| Malaysia | 2.8 | ||||
| Philippines | 0.5 | ||||
| Other | 0.3 | ||||
| Cash paid during the period for income taxes | $ | 8.4 | |||
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 9, 2026 | Showing above |
| 2024 | Feb 13, 2025 | |
| 2023 | Feb 21, 2024 | |
| 2022 | Feb 9, 2023 | |
| 2021 | Feb 9, 2022 | |
| 2020 | Feb 10, 2021 | |
| 2019 | Feb 12, 2020 | |
| 2018 | Feb 19, 2019 | |
| 2017 | Feb 20, 2018 | |
| 2016 | Feb 21, 2017 | |
| 2015 | Feb 19, 2016 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.